Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations.
In this Quarterly
Report on Form 10-Q, the terms “Kaya Holdings,” “KAYS,” “the Company,” “we,” “us”
and “our” refer to Kaya Holdings, Inc. and its subsidiaries, unless the context indicates otherwise.
Cautionary Note Regarding
ForwardLooking Statements
Information
contained in this Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section
27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act
of 1934, as amended (the ‘Exchange Act”). These forward-looking statements are generally identifiable by use of the
words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,”
“believe,” “intend” or “project” or the negative of these words or other variations on these
words or comparable terminology.
The forward-looking
statements herein represent our expectations, beliefs, plans, intentions or strategies concerning future events. Our forward-looking
statements are based on assumptions that may be incorrect, and there can be no assurance that any projections or other expectations
included in any forward-looking statements will come to pass. Moreover, our forward-looking statements are subject to various
known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be
materially different from future results, performance or achievements expressed or implied by any forward-looking statements.
Except as
required by applicable laws, we undertake no obligation to update publicly any forward-looking statements for any reason, even
if new information becomes available or other events occur in the future
Business Overview
Background
Kaya Holdings,
Inc., was incorporated in Delaware in 1993 under the name Gourmet Market, Inc. and has engaged in a number of businesses. Its
name was changed on May 11, 2007 to Netspace International Holdings, Inc. (“
Netspace
”). Netspace acquired
100% of the capital stock of Alternative Fuels Americas, Inc., a Florida corporation in January 2010 in a stock for stock transaction
and issued 100,000 shares of Series C convertible preferred stock to existing shareholders of the Florida corporation. The Company’s
name was changed in October 2010 from Netspace International Holdings, Inc. to Alternative Fuels Americas, Inc.
From 2010
through 2014 the Company was engaged in seeking to develop a biofuels business. In January 2015, the Company determined that it
was in the best interests of its stockholders to discontinue its biofuel development activities, and to instead leverage its agricultural
and business development experience and focus all its resources on the development of legal medical and recreational marijuana
opportunities in the United States and in select international markets.
Legal Medical and Recreational
Marijuana Operations
MJAI
develops and operates the Company’s legal cannabis retail operations in Oregon through controlling ownership interests in
five Oregon limited liabilities companies: MJAI Oregon 1 LLC, MJAI Oregon 2 LLC, MJAI Oregon 3 LLC and MJAI Oregon 4 LLC.
Additionally,
MJAI develops and operates the Company’s legal cannabis production and processing operations in Oregon through ownership
interests in MJAI Oregon 1, LLC for the recently acquired Eugene, Oregon Marijuana Grow and Manufacturing Facility (pursuant to
an interim Management Agreement entered into between the parties, the Company has assumed operations of the 12,000-square foot
facility pending transfer of the licenses by the OLCC to Kaya Farms, upon completion of a satisfactory compliance review) and
MJAI Oregon 5, LLC for the to-be-built 85,000-square foot Kaya Farms & Greenhouse Facility in Lebanon, Oregon (inactive, pending
construction and licensing.
In March 2014,
we applied for and were awarded our first license to operate an MMD and on July 3, 2014 opened our first Kaya Shack™ Medical
Marijuana Dispensary in Portland, Oregon, thereby becoming the first publicly traded U.S. company to own and operate an MMD. Initial
customer acceptance and media coverage was very positive, including many references to KAYS as the “Starbucks of Medical
Marijuana” by television news stations, news print publications and online news sources. In March 2015, the Company changed
its name to Kaya Holdings, Inc. to better reflect its new plan of operations.
In
April 2015, KAYS commenced its own medical marijuana grow operations for the cultivation and harvesting of legal marijuana thereby
becoming the first publicly traded U.S. company to own a majority interest in a vertically integrated legal marijuana enterprise
in the United States. In October 2015, concurrent with Oregon commencing legal sales of recreational marijuana through MMDs, KAYS
opened its second retail operation in Salem, Oregon, our first Kaya Shack™ Marijuana Superstore. Oregon. During 2015, the
Company also consolidated its grow operations and manufacturing operations into a single facility in Portland, Oregon.
OLCC
Retail Marijuana Store Licensing and Additional Legal and Recreational Marijuana Stores
In
2016, Oregon began the process to transition legal marijuana sales from Oregon Health Authority (“
OHA
”) licensed
MMDs and grow operations to Oregon Liquor Control Commission (“
OLCC
”) licensed recreational marijuana retailers
and producer and processing facilities. Effective January 1, 2017, all retailers of recreational marijuana were required to have
a recreational marijuana sales license issued by the OLLC for each retail outlet operated.
Accordingly,
in 2016 the Company applied for OLLC licenses for its two initial Kaya Shack™ retail outlets (Portland, Oregon and South
Salem, Oregon), and also submitted license applications for its two additional locations, which were under construction and development
at that time.
In
late December 2016, we received our OLCC recreational, medical and home delivery license for the South Salem Kaya Shack™
Marijuana Superstore (Kaya Shack™ OLCC Marijuana Retailer License #1) and recreational and medical sales continued without
interruption from 2016 through the present at that location.
On
March 21, 2017, we received our OLCC recreational, medical and home delivery license for the North Salem Kaya Shack™ outlet
(Kaya Shack™ OLCC Marijuana Retailer License #2) a 2,600-square foot Kaya Shack™ Marijuana Superstore in North Salem,
Oregon, whereupon the location opened for business with both recreational and medical sales.
On
May 2, 2017, we received our OLCC recreational, medical and home delivery license for our Portland Kaya Shack™ outlet (Kaya
Shack™ OLCC Marijuana Retailer License #3) after a delay of approximately four months. During that period, we were limited
to solely medical sales at the Portland location. Upon receipt of Kaya Shack™ OLCC Marijuana Retailer License #3, recreational
sales recommenced at that location.
On
February 15, 2018, we received our OLCC recreational, medical and home delivery license for the Central Salem Kaya Shack™
outlet (Kaya Shack™ OLCC Marijuana Retailer License #4) a 3,100-square foot Kaya Shack™ Marijuana Superstore in Central
Salem, Oregon. After various construction and permitting delays, on April 12, 2018, the location opened for business with both
recreational and medical sales.
Additional Kaya Shack™
Marijuana Superstores
In addition
to the four Kaya Shack™ retail marijuana stores the Company operates in Oregon, the Company plans to identify and lease
locations for, license and operate up to four additional Kaya Shack™ Marijuana Superstores in other Oregon markets over
the next 18 to 24 months, as well as explore opportunities in other states to increase its retail footprint. Additionally, the
Company is exploring opportunities to further its operation in Oregon and elsewhere through the acquisition of currently licensed
and operating retail operations, which can be converted to the Kaya Shack™ model.
A
video depicting our Company’s OLCC Licensed Stores can be seen by accessing the following link:
https://www.dropbox.com/s/49i5emi3wc0ha0d/Store%20Tour%20Final%20%28hi-res%29.mp4?dl=0
OLCC
Licensed Production and Processing Facilities for Recreational and Medical Marijuana
On March 21,
2017, KAYS announced that it was in the process of expanding its grow and manufacturing operations and had retained a realtor
to assist in identifying a suitable 30-60 acre tract of land in Oregon which would permit KAYS to expand its grow operations.
As part of this expansion, KAYS ceased operations of its Portland grow facility at the end of March 2017, arranged to maintain
its genetics library of over 30 strains of cannabis at an OHA licensed medical grow site and contracted with farmers to meet demand
until the new facility is secured, built and fully operational.
Status
of Kaya Farms™ Property in Linn County, Oregon
In August
2017, KAYS acquired a 26 acre parcel in Lebanon, Oregon, which KAYS intends to develop as a legal cannabis cultivation and manufacturing
facility. KAYS believes that the acquisition of a property will position the Company for future development, including increased
Marijuana Canopy production to the maximum extent allowed by law through use of both greenhouse and outdoor grows. A video of
the Kaya Farms™ (Architect’s Project Rendition) can be seen at the following link:
https://www.dropbox.com/s/3po31ksdilcl9l9/Kaya_Farms%20Final.mp4?dl=0
On February
9, 2018 KAYS submitted a site plan review for the Company’s envisioned 101,000 square foot OLCC licensed Kaya Farms™
Marijuana Grow and Manufacturing Complex and an application for a conditional use permit for marijuana processing on the Company
owned 26.50-acre property zoned Exclusive Farm Use (EFU) with the Linn County, Oregon Planning and Building Department.
On March 9,
2018 KAYS was notified by the Linn County, Oregon Planning and Building Department (the “
Department
”) that
the application was deemed complete and received an official letter of completeness with respect to the application. The formal
“
Letter of Completeness
,” sent March 9, 2018 by a Linn County Senior Planner, confirmed the eligibility
of the Company’s 26-acre plot for the purposes of growing legal cannabis, as well as the eligibility of the property for
a special purpose exemption for the Company’s proposed manufacturing operations.
On April 20,
2018 KAYS was notified by the Department that the site plan review for the indoor and outdoor marijuana operation on the 26.50-acre
property (which encompasses approximately 86,000 square feet of the Company’s 101,000 square feet of the Company’s
submitted buildings) had been approved. However, the conditional use permit for marijuana processing (which encompasses approximately
15,000 square feet of the Company’s 101,000 square feet of the Company’s submitted buildings) had been denied, largely
due to the scale and coverage of the proposed processing operation. Additionally, local residents requested a hearing to appeal
the approval of the site plan based on concerns that a portion of the approved site plan that supports the 36,000 square feet
of green houses for outdoor growing is not eligible for the Irrigation rights that the Company possesses for the Property.
On June 12,
2018 the Linn County Planning Commission held a hearing and adopted a motion to Deny the previously approved site plan, citing
that the proposed site plan does not comply with the odor and waste management standards set forth in Section 940.400 of the Linn
County Development Code.
On June 14,
2018 KAYS completed their application for OLCC Licensing as a Tier 2 Producer for the proposed Kaya Farms Linn County facility
so as to maintain its place in que pending the resolution of the appeal of the appeal that it intended to file with the State
of Oregon Land Use Board of Appeals (LUBA).
On August
7, 2018 KAYS (through its Oregon Counsel Larkins Vacura Kayser LLP or “LVKLAW”) filed a Notice of Appeal with LUBA.
On September
17, 2018 KAYS filed the LUBA Petition for Review No. 2018-096 and received notice that the LUBA hearing was to be held on October
18, 2018.
On October
9, 2018 LVKLAW received a letter from Linn County’s Attorney notifying them that Linn County did not intend to file a response
brief or appear at the LUBA hearing, and shortly thereafter LUBA cancelled the LUBA Hearing.
On
November 13, 2018 LUBA issued its FINAL OPINION AND ORDER (the “Order”). The Order reversed the County’s decision
and ordered the County to approve the Company’s Land Use Application for the to-be-built 85,000-square foot Kaya Farms &
Greenhouse Facility in Lebanon, Oregon.
Documents relevant to the
application and land use appeals process can be found online by accessing the following link:
https://www.dropbox.com/sh/2acc12mow6vq3pp/AAAvFzgYgayDanGLrfGQkzaEa?dl=0
Purchase
of Eugene, Oregon Marijuana Grow and Manufacturing Facility
On July 31,
2018 KAYS announced that it had entered into a preliminary agreement to purchase a Eugene, Oregon Marijuana Grow and Manufacturing
Facility in a $1.55 million deal.
On October
23, 2018 KAYS announced that it had concluded the purchase of the Eugene, Oregon based Sunstone Farms manufacturing facility,
which is licensed by the OLCC (Oregon Liquor Control Commission) for both the production (growing) of medical and recreational
marijuana flower and the processing of cannabis concentrates/extracts/edibles. The purchase includes a 12,000 square foot building
housing an indoor grow facility, as well as equipment for growing and extraction activity. The facility can produce in excess
of 800 pounds cannabis flower annually as currently outfitted.
As part of
planned expansion and renovations for the facility, KAYS (
www.kayaholdings.com
) has begun
site improvements and is ramping up production to feed their four existing OLCC licensed cannabis retail stores which currently
service the legal medical and recreational marijuana market in Oregon under the Kaya Shack™ brand (
www.kayashack.com
).
KAYS intends
to utilize the processing facilities to grow their own top-shelf, connoisseur-grade marijuana flower, produce various brands of
oils, edibles, concentrates and extracts, and develop medical grade laboratory facilities for the production of a proprietary
Kaya Cannaceuticals™ line of both CBD and CBD/THC products for the health, skincare and medical industries.
Pursuant to
an interim Management Agreement entered into between the parties, the Company has assumed operations of the 12,000-square foot
facility pending transfer of the licenses by the OLCC to Kaya Farms, upon completion of a satisfactory compliance review.
The purchase
price of $1.3 million for the OLCC licensed marijuana production and processing facility, consisting of the building and equipment
was paid for by the issuance of 12 million shares of KAYS restricted stock to the seller at closing. The shares carry a lock-up-restriction
that allows for their staged eligibility for resale over a 61-month period from the date of the purchase of the facility by KAYS.
Additionally,
the seller purchased 2.5 million restricted shares for $250,000 in cash in a private transaction with the Company. The proceeds
from the sale of those shares were and are being used for acquisition related expenses, transitional operating costs and facility
capital improvements with respect to the production and processing facility we purchased.
$2.1
Million Financing
In March 2017,
the Company completed a $2.1 million financing with an institutional investor (the “
Institutional Investor
”)
who had previously furnished KAYS with $1.2 million in financing, pursuant to a financing agreement (the
“$2.1M
Financing Agreement
”) entered into between the Company and the Institutional Investor in December 2016. Pursuant to
the $2.1M Financing Agreement, the Institutional Investor purchased $2.1 million in principal amount of convertible notes (the
“$2.1M Notes
”) from the Company as follows:
|
•
|
$400,000
in principal amount of $2.1M Notes which are convertible into shares of the Company’s common stock at a conversion
price of $0.04;
|
|
•
|
$700,000
in principal amount of $2.1M Notes which are convertible into shares of the Company’s common stock at a conversion price
of $0.07; and
|
|
•
|
$1,000,000
in principal amount of $2.1M Notes which are convertible into shares of the Company’s common stock at a conversion price
of $0.10.
|
The
purchase price for the $2.1M Notes is equal to the principal amount thereof. The $2.1M Notes have a term of two years from issuance
and bear interest at the rate of eight percent (8%) annum, which accrues and is payable to together with interest at maturity.
The Investor may convert the principal amount of the $2.1M Notes (as well as other notes it currently holds as referenced above),
together with accrued but unpaid interest thereon, into shares at the applicable conversion price, at any time or from time to
time prior to maturity. The conversion price is subject to adjustment for stock splits, stock dividends, recapitalizations and
similar transactions. The $2.1M Notes also provide that at no time may they be convertible if the number of shares being issued
upon conversion to and then held by the Institutional Investor would result in the Institutional Investor beneficially owning
in excess of 4.99% of the Company’s then outstanding shares of common stock, after giving effect to the proposed conversion.
May
2017 Financing Agreement
On
May 11, 2017, we entered into a second financing agreement with the Institutional Investor to provide the Company with up to an
additional $5.8 million in convertible note funding (the “
May 2017 Notes
”) through July 31, 2018 (the “
May 2017 Financing Agreement
”). The May 2011 Financing Agreement was amended as of July 31, 2017, to increase the
amount of funding available to the Company thereunder to $6.3 million and to extend the time period for such funding to May 31,
2019 and was subsequently amended as of November 15, 2017, March 31, 2018, and July 31, 2018 to further increase the amount of
funding available to the Company thereunder to $7.75 million and to provide for the remaining $5.8million in principal amount
of May 2017 Notes to be (a) convertible into shares of the Company’s common stock at conversion prices ranging from $0.03
to $0.11 pursuant to the terms of each May 2017 Note as described below; and (b) to extend the time period for such funding to
April 30, 2020.
Moreover,
pursuant to an additional agreement reached as of March 31, 2018, KAYS and the Institutional Investor agreed that effective as
of January 1, 2019, (a) the maturity date of all then outstanding Company promissory notes held by the Institutional Investor
and its affiliate, NWP Finance LTD, will be extended from January 1, 2019 to January 1, 2020; (b) all of the $1.75 million in
principal amount of May 2017 Notes currently outstanding and the remaining $5.8 million in principal amount of May 2017 Notes
which may be issued under the Agreement, as amended, are to be secured by a mortgage lien on the Company’s 26-acre Lebanon,
Oregon property, substantially similar in form and substance to the mortgage securing the $500,000 in principal amount of $0.03
Secured Notes purchased by the Institutional Investor, with the caveat that the property, improvements or rights to utilize them
cannot be directly or indirectly leased, assigned or otherwise pledged to any entity without approval of the Institutional Investor,
and in the event that there is a change in control of the Company or its subsidiaries the May 2017 Notes become immediately due
and payable; and (c) the Institutional Investor will be granted piggy-back registration rights with respect to shares of the Company’s
common stock it may hold or is issuable upon conversion of any Notes it or its Assigns may hold in the event the Company files
a Registration Statement on Form S-1 with the Securities and Exchange Commission under the Securities Act of 1933, as amended
to sell shares of its common stock or permit the resale by shareholders of previously issued shares of common stock, up to a maximum
of 30% of the shares registered under such registration statement.
Except
as set forth above, the May 2017 Notes are substantially similar in form and substance to the $2.1M Notes that were part of the
$2.1 million Financing Agreement entered into between the Company and the Institutional Investor in December 2016 and completed
in March of 2017 (as well as the promissory notes evidencing approximately $1.2 million in financing previously received from
the Institutional Investor in 2014 and 2015).
As
of the date of this Quarterly report, the Institutional Investor has purchased an aggregate of $2,250,000 in principal amount
of May 2017 Notes from the Company under the May 2017 Financing Agreement, as amended to date, of which (a) $500,000 in principal
amount of May 2017 Notes are convertible into shares of the Company’s common stock at a conversion price of $0.05 (the “
$0.05Notes
”); (b) $800,000 in principal amount of May 2017 Notes, which are convertible into shares of the Company’s
common stock at a conversion price of $0.03 (the “
$0.03Notes
”); (c) $950,000 in principal amount of May 2017
Notes, which are (i) convertible into shares of the Company’s common stock at a conversion price of $0.03; and (ii) secured
by a mortgage lien on the Company’s 26 acre Lebanon, Oregon property (the “
$0.03 Secured Notes
”).
The Investor will has the right
to purchase another tranche of $0.03 Notes up to an aggregate of $500,000 in principal amount, at any time and from time to time
through December 31, 2018.
Provided the
Institutional Investor has fulfilled its obligation to purchase the additional $500,000 in principal amount of $0.03 Notes from
the Company on or before December 31, 2018, the Institutional Investor will have the right to purchase up to an aggregate of $500,000
in principal amount of $0.05 Notes, at any time and from time to time through March 31, 2019
Provided the Institutional Investor
has fulfilled its obligation to purchase the additional $500,000 in principal amount of $0.05 Notes from the Company on or before
March 31, 2019, the Institutional Investor will have the right to purchase another tranche of $0.05 Notes up to an aggregate of
$500,000 in principal amount, at any time and from time to time through June 30, 2019.
Provided the
Institutional Investor has fulfilled its obligation to purchase the additional $500,000 in principal amount of $0.05 Notes from
the Company on or before June 30, 2019, the Institutional Investor will have the right to purchase up to an aggregate of $400,000
in principal amount of May 2017 Notes, which are convertible into shares of the Company’s common stock at a conversion price
of $0.08 per share, at any time and from time to time through September 30, 2019 (the “
$0.08 Notes
”).
Provided the
Institutional Investor has fulfilled its obligation to purchase the additional $400,000 in principal amount of $0.08 Notes from
the Company on or before September 30, 2019, the Institutional Investor will have the right to purchase another tranche of $0.08
Notes up to an aggregate of $400,000 in principal amount, at any time and from time to time through December 31, 2019.
Provided the
Institutional Investor has fulfilled its obligation to purchase the additional $400,000 in principal amount of $0.08 Notes from
the Company on or before December 31, 2019, the Institutional Investor will have the right to purchase another tranche of $0.08
Notes up to an aggregate of $400,000 in principal amount, at any time and from time to time through March 31, 2020.
Provided the
Institutional Investor has fulfilled its obligation to purchase the additional $400,000 in principal amount of $0.08 Notes from
the Company on or before March 31, 2020, the Institutional Investor will have the right to purchase another tranche of $0.08 Notes
up to an aggregate of $400,000 in principal amount, at any time and from time to time through June 30, 2020.
Provided the
Institutional Investor has fulfilled its obligation to purchase all $400,000 in principal amount of $0.08 Notes from the Company
on or before June 30, 2020, the Institutional Investor will have the right to purchase up to an additional $550,000 in principal
amount of May 2017 Notes from the Company at any time and from time to time through September 30, 2020, which Notes will be convertible
into shares of common stock at a conversion price of $0.11 per share (the
“$0.11 Notes
”).
Provided the
Institutional Investor has fulfilled its obligation to purchase the additional $550,000 in principal amount of $0.11 Notes from
the Company on or before September 30, 2020, the Institutional Investor will have the right to purchase another tranche of $0.11
Notes up to an aggregate of $550,000 in principal amount, at any time and from time to time through December 31, 2020.
Provided the
Institutional Investor has fulfilled its obligation to purchase the additional $550,000 in principal amount of $0.11 Notes from
the Company on or before December 31, 2020, the Institutional Investor will have the right to purchase another tranche of $0.11
Notes up to an aggregate of $1,100,000 in principal amount, at any time and from time to time through April 30, 2021.
January
2018 Financing Agreement
Effective
January 22, 2018, we entered into a financing agreement with a high net worth investor (the “
HNW Investor
”)
to provide the Company with up to $1.4 million in convertible note funding (the “
January 2018 Notes
”) through
July 31, 2018 (the “
January 2018 Financing Agreement
”). Pursuant to the January 2018 Financing Agreement,
upon execution of the January 2018 Financing Agreement, the HNW Investor purchased $100,000 in principal amount of January 2018
Notes, which are convertible into shares of the Company’s common stock at a conversion price of $0.10 per shares (the
“$0.10 Notes
”).
The January
2018 Financing Agreement was amended as of June 30, 2018 to extend the dates for all purchase rights by six months. The HNW Investor
has the right to purchase up to an aggregate of $250,000 in principal amount of January 2018 Notes, which are convertible into
shares of the Company’s common stock at a conversion price of $0.125 per share, at any time and from time to time through
December 31, 2018 (the “
$0.125 Notes
”).
Provided the
HNW Investor has fulfilled its obligation to purchase $250,000 in principal amount of $0.125 Notes from the Company on or before
December 31, 2018, the HNW Investor will have the right to purchase up to an aggregate of $300,000 in principal amount of January
2018 Notes, which are convertible into shares of the Company’s common stock at a conversion price of $0.15 per share, at
any time and from time to time through June 30, 2019 (the “
$0.15 Notes
”).
Provided the
HNW Investor has fulfilled its obligation to purchase $300,000 in principal amount of $0.15 Notes from the Company on or before
June 30, 2019, the HNW Investor will have the right to purchase up to an aggregate of $350,000 in principal amount of January
2018 Notes, which are convertible into shares of the Company’s common stock at a conversion price of $0.175 per share, at
any time and from time to time through December 31, 2019 (the “
$0.175 Notes
”).
Provided the
HNW Investor has fulfilled its obligation to purchase $350,000 in principal amount of $0.175 Notes from the Company on or before
December 31, 2019, the HNW Investor will have the right to purchase up to an aggregate of $400,000 in principal amount of January
2018 Notes, which are convertible into shares of the Company’s common stock at a conversion price of $0.20 per share, at
any time and from time to time through June 30, 2020 (the “
$0.20 Notes
”).
The purchase
price for the January 2018 Notes is equal to the principal amount thereof. The January 2018 Notes have a term of two years from
issuance, bear interest at the rate of five percent (5%) annum, which accrues and is payable to together with interest at maturity
and are otherwise substantially similar in form and substance to the $2.1M Notes and the May 2017 Notes.
July
2018 $250,000 Private Placement Funding
On
July 13, 2018, the Company entered into a preliminary agreement to acquire a 12,000 square foot indoor marijuana grow and manufacturing
facility with a current production capability of 800 pounds of high quality medical and recreational cannabis annually, as well
as the machines and equipment necessary to begin production and processing as well as utilize the current OLCC Production License
for growing, and OLCC Processing License for the manufacture of extracts, oils and edibles. On July 26, 2018 the Company completed
the first stage of the transaction with the seller’s purchase of 2,500,000 restricted shares in the Company for $250,000
in a private transaction.
Use of Proceeds
The proceeds from the offer and sale of
the $2.1M Notes, the May 2017 Notes and the January 2018 notes and are and will be used to fund the Company’s growth plan,
including the expansion of our chain of Kaya Shack™ Marijuana Superstores in Oregon, the acquisition and development of
our Lebanon, Oregon legal cannabis cultivation and manufacturing facility, the operation and development of our Eugene, Oregon
12,000 square foot indoor legal marijuana grow and manufacturing facility and the development and introduction of new Kaya Shack™
branded cannabis products.
The funds from the July 2018 $250,000
Private Placement are being used for acquisition related expenses, transitional operating costs and facility capital improvements
with respect to the Eugene, Oregon facility.
Market
Overview
According
to research firm Cowen & Co., legal cannabis sales in the U.S. are expected to reach $75 billion by 2030. The industry research
firm Arcview, estimates a $22.6 billion legal cannabis market in North America by 2021, with 87% of all sales occurring in the
United States. The Arcview forecast assumes a 27% compound annual growth rate, an assumption supported by current rates of growth,
while reliant on additional states passing both recreational and medical cannabis laws.
Thirty-three
states and the District of Columbia have legalized medical marijuana in some capacity. Additionally, ten states (Alaska, California,
Colorado, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont and Washington State) and the District of Colombia have approved
the implementation of legal recreational marijuana use. The Marijuana Business Factbook 2017, published by industry news source
Marijuana Business Daily, estimates that the legal marijuana sector will grow more than 300% from sales of $1.8 billion to $17.1
billion in 2021. The firm estimates that the economic impact of the legal cannabis industry will exceed $70 billion, placing it
almost on par with nutraceuticals and ahead of movie tickets and retail ice cream. According to the Factbook, “to get another
idea of just how big the marijuana industry has become, look to employment numbers. The cannabis sector now employs between 165,000-230,000
full and part-time workers….to put this in perspective, there are now more marijuana industry workers than there are bakers
or massage therapists in the United States”.
Kaya
Cares Cannabis Opioids Swap Program
In
November 2017 the Company assisting in initiating a conversation on the role marijuana can play in addressing the opioid epidemic
by announcing a willingness to implement Kaya Cares, an opioid – cannabis replacement program for current opioid prescription
holders seeking to explore the efficacy of marijuana as a pain management substitute. The Company is proud to announce that its
initiative was promoted online by a Now Weed Episode that gathered more than half a million views, attracted the support of minor
celebrities, and reached the highest echelons of the Oregon State Government. The Company is further pleased to share that the
Oregon Liquor Control Commission (“OLCC”) which is the State of Oregon’s marijuana licensing and regulatory
authority, has opened a dialogue with local experts to explore legal and practical ways to use cannabis to alleviate some of the
consequences of the opioid epidemic in Oregon. Kaya Holdings management has and will be participating in this critical dialogue
and hopes to be part of the solution.
Corporate
Information
Our
corporate office is located at 888 South Andrews Avenue, Suite 302, Fort Lauderdale, Florida, 33316. Our website is www.kayaholdings.com.
Information contained on our website does not constitute part of this report.
The Kaya Shack™ Brand
Kaya Holdings operates the Kaya
Shack™ brand of legal medical and recreational retail marijuana stores.
Kaya Holdings
operates four recreational marijuana retail outlets and medical marijuana dispensaries in Oregon under the Kaya Shack™ brand.
In addition to these four Kaya Shack™ retail marijuana stores, the Company plans to identify and lease locations for, license
and seek to open up to four additional Kaya Shack™ Marijuana Superstores in other Oregon markets over the next 18 to 24
months, as well as explore opportunities in other states to increase its retail footprint. Additionally, the Company is exploring
opportunities to further its operation in Oregon and elsewhere through the acquisition of currently licensed and operating retail
operations, which can be converted to the Kaya Shack™ model.
Dubbed by
the mainstream press as the “Starbucks of Marijuana” after our first outlet opened in July 2014, our operating concept
is simple to deliver a consistent customer experience (quality products, fair prices and superior customer service) to a broad
and diverse base of customers. Kaya Shack™ meets the quality needs of the “marijuana enthusiast”, the comfort
and atmosphere of all including “soccer moms” and the price sensitivities of casual smokers.
The Kaya Shack™
brand communicates positive thinking and joy, with signs adorning the walls that read “It’s a Good Day to have a Good
Day,” “Some of our Happiest Days Haven’t Even Happened Yet,” and our signature “Be Kind.”
Kaya Shack™
retail outlets are open 7 days a week- Monday through Saturday from 8:00 am to 10:00 pm, and Sunday 8:00 AM to 9:00 PM. Operations
follow an operational manual that details procedures for 18 areas of operation including safety, compliance, store opening, store
closing, merchandising, handling of cash, inventory control, product intake, store appearance and employee conduct.
In compliance
with regulations, all marijuana and marijuana infused products sold through our stores are quality tested by independent labs
to assure adherence to strict quality and OLCC regulations.
Kaya
Shack™ Retail Outlets
I. Kaya
Shack™ , 1719 SE Hawthorne Blvd., Portland, Oregon
Our first Kaya Shack™ is
in the heart of the trendy Hawthorne district in southeast Portland (the Greenwich Village of the West Coast). The store
is located next door to a cell phone repair shop, and near to Devil’s Dill restaurant and No Fun pub. There are also a McMenamins
restaurant, tattoo parlor, convenience store, hair/nail salon and a soccer sports bar. The area around the shop is mixed use (commercial
and residential).
The first
Kaya Shack™ is approximately 700 square feet and is the model for the Company’s small urban shops. The store features
an 8’ display case showcasing at least 25 strains of marijuana flower, an additional 8’ display case with a varied
selection of oils, concentrates and topicals, and a standing display case with edibles such as cookies, chocolates, gummies, hard
candies and more. The store also has a hospitality area that offers free water, coffee, tea and hot cocoa. As required by law,
all products containing marijuana are either behind locked glass or behind the counter and out of customer reach.
Our
Portland outlet initially operated as an MMD. In connection with the transition of recreational marijuana retailer licenses from
the OHA to the OLCC, we applied for an OLCC license for the facility in 2016. However, issuance of the OLCC license for the Portland,
Oregon outlet was delayed because of the need to resolve various local issues with the City of Portland. Accordingly, from January
1, 2017 until May 2, 2017, when we received Kaya Shack
TM
OLCC Marijuana Retailer License #3 for this location,
sales at the Portland, Oregon location were limited to medical marijuana and as such our revenues from this location were impacted.
II.
Kaya Shack ™ Marijuana Superstore, South Salem, Oregon
Our second
location (the first Kaya Shack
TM
Marijuana Superstore) opened for business on October 17, 2015 in South
Salem, Oregon in time to take advantage of early recreational sales. Our South Salem Kaya Shack
™
Marijuana superstore received Kaya Shack
TM
OLCC Marijuana Retailer License #1 prior to the January 1,
2017 deadline to do so and both recreational and medical marijuana sales have continued at this location seamlessly.
The store
is located in a strip mall alongside a Caesar’s Pizza, Aaron’s furniture, a convenience store, a tanning salon, and
a nail salon. The plaza also has a Subway, a sports bar and a laundromat. The area around the shop is primarily commercial with
residential complexes to be constructed beginning in 2018.
Located in
the southern portion of Oregon’s capital city, Salem, this Kaya Shack™ is approximately 2,100 square feet and is the
model for the Company’s marijuana superstore. The store features an 8’ display case with more than 25 strains of marijuana
flower, an additional 8’ display case with a varied selection of oils, concentrates and topicals, an 8’ display case
with accessories such as pipes, papers and brand related merchandise, and a standing display case with edibles such as cookies,
chocolates, gummies, hard candies and more. The store also has a hospitality area that offers free water, coffee, tea and hot
cocoa, and a “third space” sitting area. A fresh juice bar and a production room offering customers a chance to watch
as the Company’s branded marijuana cigarettes, Kaya Buddies™, are produced are being installed.
III. Kaya Shack™
Marijuana Superstore, North Salem, Oregon
Our third
Kaya Shack™ (located in North Salem, Oregon) received Kaya Shack
TM
OLCC Marijuana Recreational Retailer
License #2 on March 21, 2017. The store is located in a strip mall alongside a Starbucks Coffee, laundromat, and Adam’s
Rib. The plaza also has medical offices and an Applebee’s. The area around the shop is primarily commercial.
Located
in the northern portion of Oregon’s capital city, Salem, this Kaya Shack™ is 2,600 square feet. The store features
an 8’ display case with more than 25 strains of marijuana flower, an additional 8’ display case with a varied selection
of oils, concentrates and topicals, an 8’ display case with accessories such as pipes, papers and brand related merchandise,
and standing display cases with edibles such as cookies, chocolates, gummies, hard candies and more. The store also has a hospitality
area that offers free water, coffee, tea and hot cocoa and a “third space” sitting area. The Company plans to install
a fresh juice bar, and a glassed-off kitchen facility slated to produce edibles and confections.
IV.
Kaya Shack™ Marijuana Superstore, Central Salem, Oregon
Our
fourth Kaya Shack™ is located in North Salem, Oregon in a strip mall directly behind Carl Jr. and Popeye’s Chicken
restaurants and alongside a microbrewery sports bar, laundromat, and Hawaiian sandwich shop. The area around the shop is primarily
commercial with residential complexes to be constructed in 2018. It has a footprint of approximately 3100 square feet and utilizes
the Kaya Shack™ Marijuana Superstore model reflected in our third outlet and we believe substantially completes our geographic
penetration of the Salem, Oregon market.
We
received Kaya Shack
TM
OLCC Marijuana Recreational Retailer License #4 on February 15, 2018. After various
construction and permitting delays, on April 12, 2018 the location opened for business with both recreational and medical sales.
The store
features an 8’ display case with more than 25 strains of marijuana flower, an additional 8’ display case with a varied
selection of oils, concentrates and topicals, an 8’ display case with accessories such as pipes, papers and brand related
merchandise, and standing display cases with edibles such as cookies, chocolates, gummies, hard candies and more. The store also
has a hospitality area that offers free water, coffee, tea and hot cocoa. The superstore concept also provides for a “third
space” sitting area, a fresh juice bar, and in this location, an area for the production of the Company’s brand of
custom glass pipes.
Kaya Shack™
Home Delivery
In early February
of 2017, the Company began the process of filing applications to add Home Delivery Service for three of its Kaya Shack™
retail marijuana stores at the advice of one of their OLCC examiners. As of the date of this Annual Report, the Company has received
approvals from the OLCC to add Home Delivery to all four of its currently OLCC licensed locations.
In addition
to providing added value and convenience for our customers, extending visibility and building brand recognition for the Kaya Shack™
brand, we believe that Home Delivery provides greater market penetration, by allowing sales throughout the geographic area that
our stores are licensed in. There is no limit to the number of delivery vehicles that can service an individual area using just
one store as a home base, so in effect we intend to use this service to construct additional “virtual” Kaya Shacks™
without the added costs of additional brick and mortar locations.
On April 11,
2017 the Company took delivery of its first four Fiat 500 cars to begin building their Kaya Car™ Home Delivery Service fleet.
The cars have been customized with distinctive Kaya Shack™ vehicle wrapping featuring the Company’s branding logos
and colors and outfitted with safes and security. As of the date of this filing the Company has begun hiring drivers and is awaiting
final development of the software necessary to integrate delivery orders with the requisite OLCC reporting requirements within
its point of sale software system.
Upon completion
of the software and related Kaya Shack™ Delivery App for use by its customers to order “Fast, Free Delivery”
of the complete line of both medical and recreational grade Kaya Shack™ cannabis products, the Company intends to launch
its Kaya Car™ Home Delivery Service and to commence the next stage of branding and retail development.
Kaya
Farms™ Marijuana Grow and Manufacturing Complex- Lebanon, Oregon
On
March 21, 2017, KAYS announced that it was in the process of expanding its grow and manufacturing operations and had retained
a realtor to assist in identifying a suitable acre tract of land in Oregon which would permit KAYS to expand its grow operations.
As part of this expansion, KAYS ceased operations of its then existing Portland grow facility at the end of March 2017, arranged
to maintain its genetics library of over 30 strains of cannabis at an OHA licensed medical grow site and contracted with farmers
to meet demand until the new facility is secured, built and fully operational.
In
August 2017, KAYS acquired a 26 acre parcel in Lebanon, Oregon, which KAYS intends to develop as a legal cannabis cultivation
facility. KAYS believes that the acquisition of a property will position the Company for future development, including increased
Marijuana Canopy production to the maximum extent allowed by law through use of both greenhouse and outdoor grows. A video of
the Kaya Farms™ (Architect’s Project Rendition) can be seen at the following link:
https://www.dropbox.com/s/3po31ksdilcl9l9/Kaya_Farms%20Final.mp4?dl=0
Kaya Farms™
Status
On
February 9, 2018 KAYS submitted a site plan review for the Company’s envisioned 101,000 square foot OLCC licensed Kaya Farms™
Marijuana Grow and Manufacturing Complex and an application for a conditional use permit for marijuana processing on the Company
owned 26.50-acre property zoned Exclusive Farm Use (EFU) with the Linn County, Oregon Planning and Building Department.
On
March 9, 2018 the Company was notified by the Linn County, Oregon Planning and Building Department (the “
Department
”) that the application was deemed complete and received an official letter of completeness with respect to the application.
The formal “
Letter of Completeness
,” sent March 9, 2018 by a Linn County Senior Planner, confirmed
the eligibility of the Company’s 26-acre plot for the purposes of growing legal cannabis, as well as the eligibility of
the property for a special purpose exemption for the Company’s proposed manufacturing operations.
On
April 20, 2018 the Company was notified by the Department that the site plan review for the indoor and outdoor marijuana operation
on the 26.50-acre property (which encompasses approximately 86,000 square feet of the Company’s 101,000 square feet of the
Company’s submitted buildings) had been approved. However, the conditional use permit for marijuana processing (which encompasses
approximately 15,000 square feet of the Company’s 101,000 square feet of the Company’s submitted buildings) had been
denied, largely due to the scale and coverage of the proposed processing operation. Additionally, local residents requested a
hearing to appeal the approval of the site plan based on concerns that a portion of the approved site plan that supports the 36,000
square feet of green houses for outdoor growing is not eligible for the Irrigation rights that the Company possesses for the Property.
On
June 12, 2018 the Linn County Planning Commission held a hearing and adopted a motion to Deny the previously approved site plan,
citing that the proposed site plan does not comply with the odor and waste management standards set forth in Section 940.400 of
the Linn County Development Code.
On
August 7, 2018 KAYS (through its Oregon Counsel Larkins Vacura Kayser LLP or “LVKLAW”) filed a Notice of Appeal with
LUBA.
On
September 17, 2018 KAYS filed the LUBA Petition for Review No. 2018-096 and received notice that the LUBA hearing was to be held
on October 18, 2018.
On
October 9, 2018 LVKLAW received a letter from Linn County’s Attorney notifying them that Linn County did not intend to file
a response brief or appear at the LUBA hearing, and shortly thereafter LUBA cancelled the LUBA Hearing.
On
November 13, 2018 LUBA issued its FINAL OPINION AND ORDER (the “Order”). The Order reversed the County’s decision
and ordered the County to approve the Company’s Land Use Application for the to-be-built 85,000-square foot Kaya Farms &
Greenhouse Facility in Lebanon, Oregon.
Eugene, Oregon Marijuana
Grow and Manufacturing Facility
On
July 31, 2018 KAYS announced that it had entered into a preliminary agreement to purchase a Eugene, Oregon Marijuana Grow and
Manufacturing Facility in a $1.55 million deal.
On
October 23, 2018 KAYS announced that it had concluded the purchase of the Eugene, Oregon based Sunstone Farms manufacturing facility,
which is licensed by the OLCC (Oregon Liquor Control Commission) for both the production (growing) of medical and recreational
marijuana flower and the processing of cannabis concentrates/extracts/edibles. The purchase includes a 12,000 square foot building
housing an indoor grow facility, as well as equipment for growing and extraction activity. The facility can produce in excess
of 800 pounds cannabis flower annually as currently outfitted.
As
part of planned expansion and renovations for the facility, KAYS (
www.kayaholdings.com
) has
begun site improvements and is ramping up production to feed their four existing OLCC licensed cannabis retail stores which currently
service the legal medical and recreational marijuana market in Oregon under the Kaya Shack™ brand (
www.kayashack.com
).
KAYS
intends to utilize the processing facilities to grow their own top-shelf, connoisseur-grade marijuana flower, produce various
brands of oils, edibles, concentrates and extracts, and develop medical grade laboratory facilities for the production of a proprietary
Kaya Cannaceuticals™ line of both CBD and CBD/THC products for the health, skincare and medical industries.
Pursuant
to an interim Management Agreement entered into between the parties, the Company has assumed operations of the 12,000-square foot
facility pending transfer of the licenses by the OLCC to Kaya Farms, upon completion of a satisfactory compliance review.
The
purchase price of $1.3 million for the OLCC licensed marijuana production and processing facility, consisting of the building
and equipment was paid for by the issuance of 12 million shares of KAYS restricted stock to the seller at closing. The shares
carry a lock-up-restriction that allows for their staged eligibility for resale over a 61-month period from the date of the purchase
of the facility by KAYS.
Additionally,
the seller purchased 2.5 million restricted shares for $250,000 in cash in a private transaction with the Company. The proceeds
from the sale of those shares were and are being used for acquisition related expenses, transitional operating costs and facility
capital improvements with respect to the production and processing facility we purchased.
Kaya
Farms Production Results for Q-3, 2018
On
our shareholder conference call last December KAYS stated that we expected to have Kaya Farms in production by Fall 2018.
Although
we are not yet in production at the Lebanon Farm facility due to the delay from zoning issues, we confirm that the Eugene, Oregon
Kaya Farms Indoor Grow, Processing & Cannaceuticals Facility yielded its first usable crop of two strains of shelf flower
during Q-3 2018 as follows:
Stone
Mountain Tangerine (approximately 23.38 lb of finished flower).
Train
Wreck (approximately 28.74 lb of finished flower).
Please
see the following pages for copies of testing results and pictures of various aspects of production.
Note:
The facility is currently being renovated, and these small numbers are not representative of yields expected in first quarter
2019 and beyond.
Kaya Farms™
- Cannabis and Cannabis Products
Kaya
Buddie™ Strain Specific Cannabis Cigarettes
In
2016 the Company introduced a signature line of strain-specific connoisseur-grade, pre-rolled cannabis cigarettes branded as “Kaya
Buddies™”. Kaya Buddies™ cannabis cigarettes have been very well received by medical patients and recreational
users, with the Company selling almost 100,000 Kaya Buddies™ since launching the brand in January 2016. The brand, marketed
under the tagline “Buds with Benefits”, features over 50 different strains of connoisseur-grade, high quality cannabis
and proprietary specialty blends. In early 2018 the Company set up a formal manufacturing center for the production of Kaya Buddies™
at its South Salem Kaya Shack Superstore (Kaya #2) and is in the process of completing remodeling there to showcase the production
of their Kaya Buddies™ cannabis cigarettes to shoppers.
Other Potential Markets
We believe
that revenues and profitability will be enhanced through our planned opening of additional retail outlets utilizing the Kaya Shack™
brand and model in our chain, as well as economies of scale achieved by being a multi-location retail chain and being vertically
integrated with grow and manufacturing operations. Ultimately, we believe that we can successfully enter other markets as they
open up by applying our “brand” retail chain and vertically integrated grow and manufacture model to other states
that legalize recreational marijuana use. Where applicable, we will seek to leverage our public company status to finance organic
growth and enable acquisitions of existing locations for the Kaya Shack brand, as well as look to acquire and grow additional
brands.
The California
recreational cannabis market is by far the largest potential market in the country, and our operations in Oregon allow for a natural
progression and expansion down the I-5 corridor into California. Florida, should it become a recreational market, could be a potentially
large market for us as well, because we believe that KAYS would have a distinct advantage in the state, as it is one of the few
Florida-based entities whose management has significant experience in owning and operating retail dispensaries, a grow and manufacturing
operations.
Growth Strategy
The Company
has established a well-defined strategy for entering and maintaining a strong presence in the legal marijuana sector. The cornerstones
of this strategy include:
|
·
|
All
operations are to be conducted in accordance with State and Local Laws and Federal Enforcement Policies and Priorities
as it relates to Marijuana (as outlined in the Justice Department's Cole Memo dated August 29, 2013, former US Attorney General
Jeff Sessions Memo dated January 4, 2018, and subsequent commentary from US Attorney for the District of Oregon Billy Williams).
|
·
|
|
The
Company will seek to operate in a vertically integrated manner (grow, process and sell) wherever permitted by law. In states
where vertical integration is not permitted, the Company plans to determine which of the permitted activities offers
the most potential for growth and value creation.
|
·
|
|
The
Company will seek to engage, sponsor or lead local advocacy and lobbying groups that have a significant impact on the
evolution and character of laws and the regulations under which legal marijuana operations are implemented in select markets.
|
·
|
|
The
Company shall work with law enforcement and government officials to insure compliance with all regulations.
|
Marketing and Sales
The Company will only market its
legal marijuana as in compliance with applicable state law.
The Company employs a marketing
campaign consisting of four cornerstones:
|
·
|
Promoting
and establishing the Kaya Shack™ brand.
|
|
·
|
A
positive and active online presence.
|
|
·
|
Daily
specials and promotions.
|
|
·
|
Quirky
and fun holiday specials.
|
Our core strategic marketing
objectives include:
|
|
Establishingthe
Kaya Shack™ Brand
– positioning the Company’s brand to have positive and value related
associations with all prospective and existing customers.
|
|
|
Operating
Cooperatively
- cooperation, as a strategy, helps develop a network of suppliers and marketing channels
able to promote Kaya Shack™.
|
|
|
Delivering
Value
- customer value is achieved when the perceived value of what we sell along with the value of the
experience we deliver exceeds the price we charge.
|
|
|
Driving
Customer Traffic
- the only two ways to increase store income is to sell more to our existing customers and
attract new customers. Programs are in place to accomplish both tasks.
|
Government Regulation
We are subject
to general business regulations and laws, as well as regulations and laws directly applicable to our operations. As we continue
to expand the scope of our operations, the application of existing laws and regulations could include matters such as pricing,
advertising, consumer protection, quality of products, and intellectual property ownership. In addition, we will also be subject
to new laws and regulations directly applicable to our activities.
Any existing
or new legislation applicable to us could expose us to substantial liability, including significant expenses necessary to comply
with such laws and regulations, which could hinder or prevent the growth of our business.
Federal, state
and local laws and regulations governing legal recreational and medical marijuana use are broad in scope and are subject to evolving
interpretations, which could require us to incur substantial costs associated with compliance. In addition, violations of these
laws or allegations of such violations could disrupt our planned business and adversely affect our financial condition and results
of operations. In addition, it is possible that additional or revised federal, state and local laws and regulations may be enacted
in the future governing the legal marijuana industry. There can be no assurance that we will be able to comply with any such laws
and regulations and its failure to do so could significantly harm our business, financial condition and results of operations.
Competition
The legal
marijuana sector is rapidly growing and the Company faces significant competition in the operation of retail outlets, MMDs and
grow facilities. Many of these competitors will have far greater experience, more extensive industry contacts and greater financial
resources than the Company. There can be no assurance that we can adequately compete to succeed in our business plan.
Employees
As of the
date of this Annual Report, our Oregon operations have a total of 17 part-time store employees including budtenders, trimmers,
growers, and 5 full-time employees, consisting of two store managers, a Sales and Marketing Coordinator, the Director of Dispensary
and Grow Operations and a Master Grower. Additionally, we engage several consultants to assist with daily duties and business
plan implementation and execution. Additional employees will be hired and other consultants engaged in the future as our business
expands.
Critical Accounting
Estimates
The following
are deemed to be the most significant accounting estimates affecting us and our results of operations:
Fair Value of Financial
Instruments
The Company
follows the provisions of ASC 820. This Topic defines fair value, establishes a measurement framework and expands disclosures
about fair value measurements. We apply these provisions to estimate the fair value of our financial instruments including cash,
accounts payable and accrued expenses, and notes payable.
Income Taxes
The Company
accounts for income taxes in accordance with ASC 740, Accounting for Income Taxes, as clarified by ASC 740-10, Accounting for
Uncertainty in Income Taxes. Our deferred income taxes are determined based on the estimated future tax effects of differences
between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Deferred income
tax provisions and benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes,
the Company considers tax regulations of the jurisdictions in which the Company operates, estimates of future taxable income,
and available tax planning strategies. If tax regulations, operating results or the ability to implement taxplanning strategies
vary, adjustments to the carrying value of deferred tax assets and liabilities may be required. Valuation allowances are recorded
related to deferred tax assets based on the “more likely than not” criteria of ASC 740.
The Company
recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more
likely than not sustain the position following an audit. For tax positions meeting the “morelikelythannot” threshold,
the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being
realized upon ultimate settlement with the relevant tax authority.
Recently Issued Accounting
Pronouncements
There are
no recent accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”), the American Institute
of Certified Public Accountants (“AICPA”), and the SEC believed by management to have a material impact on the Company’s
present or future financial statements.
Off-Balance Sheet
Arrangements
There are
no off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Results
of Operations
Three months ended September
30, 2018 compared to three months ended September 30, 2017
Revenues
We
had revenues of $303,888 for the three months ended September 30, 2018, as compared to revenues of $320,950 for the three months
ended September 30, 2017. The decrease is due to the normal fluctuation in the market. As a result, revenues from legal recreational
sales were slightly decreased compared to the comparable period in 2017.
Selling,
General and Administrative Expenses
Selling,
general and administrative decreased to $260,652 for the three months ended September 30, 2018, as compared to $367,975 for the
three months ended September 30, 2017. This decrease reflects the fact that some of the expenses associated with this category
have decreased over time due to investments made in the corresponding period for 2017.
Professional Fees
Professional
fees were $511,415 for the three months ended September 30, 2018, as compared to $166,150 for the three months ended September
30, 2017. These costs have increased as a result of stock issuance in exchange for professional services and the shares were valued
at market price on issuance date.
Interest expense
Interest
expense and debt amortization expense increased to $962,716 for the three months ended September 30, 2018 from $685,049 for the
three months ended September 30, 2017. These increases reflected additional debt incurred in the 2017 and 2018 period to acquire
land and fund expansion of our operations.
Net Income
We
incurred net income of $579,924 for the three months ended September 30, 2018, as compared to a net loss of $(578,902) for the
three months ended September 30, 2017.
The
majority of our net income during the three month period ending September 30, 2018 was a result of the derivative liabilities
from the conversion of debt in the three months ended September 30, 2018 and reduction in our stock price as well as the less volatility
factors used in the derivative calculations.
Nine
months ended September 30, 2018 compared to Nine months ended September 30, 2017
Revenues
We
had revenues of $850,386 for the nine months ended September 30, 2018, as compared to revenues of $667,601 for the nine months
ended September 30, 2017. The increase is largely due to the fact that in 2017 our Portland Store was unable to process recreational
sales for the first quarter due to a delay in receiving our Portland City Licensing. In addition, the fourth retail store was
begun operating in 2nd quarter of 2018. As a result, revenues from legal recreational sales were largely generated from retail
sales at one outlet during most of the 2017 period, as compared to four outlets in the comparable period in 2018. All four of
the Company’s retail locations have now received full OLCC licensing.
Selling,
General and Administrative Expenses
Selling,
general and administrative decreased to $599,898 for the nine months ended September 30, 2018, as compared to $911,598 for the
nine months ended September 30, 2017. This decrease reflects the fact that some of the expenses associated with this category
have decreased over time due to investments made in the corresponding period for 2017.
Professional
Fees
Professional
fees were $1,869,474 for the nine months ended September 30, 2018, as compared to $523,551 for the nine months ended September
30, 2017. These costs have increased as a result of paying employees and consultants with common stock and the increased level
of retail operations.
Interest
expense
Interest
expense and debt amortization expense increased to $2,370,646 for the nine months ended September 30, 2018 from $1,939,194 for
the nine months ended September 30, 2017. These increases reflected additional debt incurred in the 2017 and 2018 period to acquire
land and fund expansion of our operations.
Net
Income
We
incurred net income of $11,830,652 for the nine months ended September 30, 2018, as compared to a net income of $2,451,488 for
the nine months ended September 30, 2017.
The
majority of our net income during the nine-month period ending September 30, 2018 was a result of the derivative liabilities from
the conversion of debt in the nine months ended September 30, 2018 and September 30, 2017 and from stabilization of our stock
prices that reduces the volatility factors used in the derivative calculations. In addition, as noted above, our revenues were
increased during the 2018 quarters as a result of our ability to process legal recreational marijuana sales at all of our retail
locations and our gross profit increased by $97,912 as a result of the
increased
sales volume.
Liquidity and Capital
Resources
$2.1
Million Financing
In
March 2017, the Company completed a $2.1 million financing with an institutional investor (the “Investor”) who had
previously furnished KAYS with $1.2 million in financing, pursuant to a financing agreement (the “$2.1M Financing Agreement”)
entered into between the Company and the Investor in December 2016. For more details regarding the $2.1 million Financing please
see the Company’s 2017 10-K.
$7.75
Million Financing
On May 11,
2017, we entered into a second financing agreement with the Institutional Investor to provide the Company with up to an additional
$5.8 million in convertible note funding (the “
May 2017 Notes
”) through July 31, 2018 (the “
May 2017 Financing Agreement
”). The May 2017 Financing Agreement was amended as of July 31, 2017, to increase
the amount of funding available to the Company thereunder to $6.3 million and to extend the time period for such funding to May
31, 2019 and was subsequently amended as of November 15, 2017 and as of March 31, 2018, to further increase the amount of funding
available to the Company thereunder to $7.75 million and to provide for the remaining $5.8million in principal amount of
May 2017 Notes to be (a) convertible into shares of the Company’s common stock at conversion prices ranging from $0.03 to
$0.11 pursuant to the terms of each May 2017 Note as described below; and (b) to extend the time period for such funding to April
30, 2020.
Moreover,
pursuant to an additional agreement reached as of March 31, 2018, KAYS and the Institutional Investor agreed that effective as
of January 1, 2019, (a) the maturity date of all then outstanding Company promissory notes held by the Institutional Investor
and its affiliate, NWP Finance LTD, will be extended from January 1, 2019 to January 1, 2020; (b) all of the $1.75 million in
principal amount of May 2017 Notes currently outstanding and the remaining $5.8 million in principal amount of May 2017 Notes
which may be issued under the Agreement, as amended, are to be secured by a mortgage lien on the Company’s 26-acre Lebanon,
Oregon property, substantially similar in form and substance to the mortgage securing the $500,000 in principal amount of $0.03
Secured Notes purchased by the Institutional Investor, with the caveat that the property, improvements or rights to utilize them
cannot be directly or indirectly leased, assigned or otherwise pledged to any entity without approval of the Institutional Investor,
and in the event that there is a change in control of the Company or its subsidiaries the May 2017 Notes become immediately due
and payable; and (c) the Institutional Investor will be granted piggy-back registration rights with respect to shares of the Company’s
common stock it may hold or is issuable upon conversion of any Notes it or its Assigns may hold in the event the Company files
a Registration Statement on Form S-1 with the Securities and Exchange Commission under the Securities Act of 1933, as amended
to sell shares of its common stock or permit the resale by shareholders of previously issued shares of common stock, up to a maximum
of 30% of the shares registered under such registration statement.
Except as
set forth above, the May 2017 Notes are substantially similar in form and substance to the $2.1M Notes that were part of the $2.1
million Financing Agreement entered into between the Company and the Institutional Investor in December 2016 and completed in
March of 2017 (as well as the promissory notes evidencing approximately $1.2 million in financing previously received from the
Institutional Investor in 2014 and 2015). For more details regarding the $7.75 million Financing Agreement please see the Company’s
2017 10-K.
As
of the date of this Quarterly report, the Institutional Investor has purchased an aggregate of $2,250,000 in principal amount
of May 2017 Notes from the Company under the May 2017 Financing Agreement, as amended to date, of which (a) $500,000 in principal
amount of May 2017 Notes are convertible into shares of the Company’s common stock at a conversion price of $0.05 (the “
$0.05Notes
”); (b) $800,000 in principal amount of May 2017 Notes, which are convertible into shares of the Company’s
common stock at a conversion price of $0.03 (the “
$0.03Notes
”); (c) $950,000 in principal amount of May 2017
Notes, which are (i) convertible into shares of the Company’s common stock at a conversion price of $0.03; and (ii) secured
by a mortgage lien on the Company’s 26 acre Lebanon, Oregon property (the “
$0.03 Secured Notes
”). For
more details regarding the $7.75 million Financing Agreement please refer to the early discussion in this document.
January
2018 Financing
Effective
January 22, 2018, and amended as of July 31, 2018 we entered into a financing agreement with a high net worth investor (the “
HNW Investor
”) to provide the Company with up to $1.4 million in convertible note funding (the “
January 2018 Notes
”) through July 31, 2018 (the “
January 2018 Financing Agreement
”). Pursuant to the January 2018 Financing Agreement, upon execution of the January 2018 Financing Agreement, the HNW Investor
purchased $100,000 in principal amount of January 2018 Notes, which are convertible into shares of the Company’s common
stock at a conversion price of $0.10 per shares (the
“$0.10 Notes
”).
The January
2018 Financing Agreement was amended as of June 30, 2018 to extend the dates for all purchase rights by six months. For more details
regarding the January 2018 Financing Agreement please refer to the early discussion in this document.
July
2018 $250,000.00 Private Placement Funding
On July 13,
2018, the Company entered into a preliminary agreement to acquire a 12,000 square foot indoor marijuana grow and manufacturing
facility with a current production capability of 800 pounds of high quality medical and recreational cannabis annually, as well
as the machines and equipment necessary to begin production and processing as well as utilize the current OLCC Production License
for growing, and OLCC Processing License for the manufacture of extracts, oils and edibles.
On July 26,
2018 the Company completed the first stage of the transaction with the seller’s purchase of 2,500,000 restricted shares
in the Company for $250,000 in a private transaction. The proceeds from the sale of those shares were and are being used for acquisition
related expenses, transitional operating costs and facility capital improvements with respect to the production and processing
facility we purchased.
On October
23, 2018 KAYS announced that it had concluded the transaction and acquired the facility; for more details regarding the purchase
of the facility please refer to the early discussion in this document.
Use
of Proceeds
The proceeds
from the offer and sale of the $2.1M Notes, the May 2017 Notes and the January 2018 notes and are and will be used to fund the
Company’s growth plan, including the expansion of our chain of Kaya Shack™ Marijuana Superstores in Oregon, the acquisition
and development of our Lebanon, Oregon legal cannabis cultivation and manufacturing facility, the operation and development of
our Eugene, Oregon 12,000 square foot indoor legal marijuana grow and manufacturing facility and the development and introduction
of new Kaya Shack™ branded cannabis products.
The funds
from the July 2018 $250,000 Private Placement are being used for acquisition related expenses, transitional operating costs and
facility capital improvements with respect to the Eugene, Oregon facility.
Plan
of Operations
Management
believes that consummation of the proceeds received and expected to be received from the above described financings as well as
any other financing transactions that it may enter into, combined with existing and anticipated revenues, has alleviated the Company’s
financial difficulties to a significant extent and will allow the Company to meet its anticipated working capital needs for a
period of between twelve and eighteen months from the date of this report. However, there can be no assurance that the balance
of the $7.75 million financing will be completed, or that management’s belief will be correct and that the Company will
not sooner require additional financing to meet its working capital needs prior to achieving profitability or positive cash flow.
Moreover, we may not be successful in raising additional capital on commercially reasonable terms, if and when needed, in which
case our business, financial condition, cash flows and results of operations may be materially and adversely affected.